Iran Slowly Weans Exports Off Commodity Dependence

EghtesadOnline: The share of Iran's commodity exports from total merchandise exports has declined from 87% in 1995 to 73% in 2017, according to the United Nations Conference on Trade and Development's 2019 issue of the State of Commodity Dependence report.

News ID: ۷۴۷۳۸۹

21 May 2019

The average share between 2013-17 stood at 75%. The value of the country's commodity exports rose from $15.88 billion to $65.78 billion from 1995 to 2017. On average, $58.78 billion worth of commodities were exported per year between 2013 and 2017.

A country is considered to be export-commodity-dependent when more than 60% of its total merchandise exports are composed of commodities.

As commodity dependence can have a negative impact on a country’s economic development, it is extremely important to monitor the evolution of such dependence throughout the world, the report reads, adding that detailed statistics on commodity dependence, in particular, provide an invaluable tool for a comprehensive analysis of its causes and consequences, and contribute significantly to the policy debate about measures needed to address it in the short and long terms, Financial Tribune reported.

The UNCTAD report also shows the share of Iran's commodity exports from GDP rose from 13.9% in 1995 to 14.3% in 2017.

The average share between 2013 and 2017 stood at 13%.

One key finding of the report is that during the period, 102 out of 189 countries (54%) were commodity-dependent.

Commodity dependence is almost exclusively a developing-country phenomenon as only 13% of developed countries are commodity-dependent, compared with almost two-thirds (64%) of developing and transition economies.

It is also noteworthy that the number of commodity-dependent countries increased from 92 in 1998–2002 to 1,022 in 2013–17, but the number of countries dependent on the export of agricultural products declined from 50 to 37 between these two periods, while the number of mineral-dependent countries steadily rose, from 14 to 33, and the number of energy-dependent countries increased from 28 to 32.

UNCTAD's data on Iran show the share of agricultural products from merchandise exports decreased from 8-5% between 2013 and 2017. The average share during 2013-17 stood at 5%.

For fuels, the percentage decreased from 77% in 1995 to 63% in 2017. The average share in the period was at 65%.

This is while for ores, metals, precious stones and non-monetary gold, the share rose from 2% in 1995 to 5% in 2017. The average during 2013-17 was at 5%.

According to UNCTAD, commodity-dependent is much more than an adjective. It is a condition that often correlates with vulnerability and poverty. A condition so persistent that it does not only describe a country’s present, but most likely will determine its future.

"Commodity dependence may not make the headlines of newspapers, but its effects do. When a country’s economy is not diversified and relies heavily on basic products, it puts itself at the mercy of international market prices. When prices go down, employment, exports and government revenue suffer. In other words, putting too many eggs in one basket renders the country vulnerable," Pamela Coke-Hamilton, director of UNCTAD's Division on International Trade and Commodities, wrote in an article recently published by the World Economic Forum.

Oil Dependence

Iran's leading commodity exports is oil and petroleum-based products, accounting for about two-thirds of total merchandise exports between 2013 and 2017.

The concept of commodity dependence is strikingly illustrated in the case of Iran, considering the current state of sanctions regime imposed by the United States.

As Washington has moved to block Tehran's oil exports, the economy has inevitably felt the pinch.

The Statistical Center of Iran's latest report shows Iran's gross domestic product saw a contraction of -3.8 during the first three quarters of the last fiscal year (March 21-Dec. 21, 2018) compared with the corresponding period of the year before.

Economic growth, excluding oil, stood at -1.9%.

As we wrote earlier, the weak performance of the economy as reflected in the latest SCI report is mainly traced back to last year's reimposition of sanctions by the United States after US President Donald Trump unilaterally walked out of the nuclear deal Iran had signed with world powers, including the US, in 2015.

The first round of renewed US sanctions reimposed on August 7 prohibits Iran's purchase of US dollars and precious metals, part of a larger move that attempts to cut the country off from the international financial system. A second tranche of sanctions on Iran's oil and gas sector took effect on Nov. 4.

Oil, Iran's main source of revenue, has taken the brunt of sanctions.

The International Monetary Fund has forecast a deepening recession for Iran's economy this year, projecting a real GDP growth of -6% in 2019 after a contraction of 3.9% the year before.

In its newly-released "World Economic Outlook" report, the IMF sees growth will come back at a meager rate of 0.2% in 2020 before increasing to 1.1% in 2024.

The IMF report came a few days after the World Bank downgraded Iran's economic growth estimates and forecasts in a new report that put the Islamic Republic's real GDP growth for 2018 at -1.6%.

The World Bank forecast that the rate will further contract to reach -3.8% in 2019 before expanding to 0.9% in 2020 and 1% in 2021. The report also estimates Iran's real GDP per capita growth stood at -2.6% in 2018. Forecasts for 2019, 2020 and 2021 have been put at -4.8%, 0% and 0.1% respectively.

Entailing Vulnerability

As Coke-Hamilton says the problem is not dependence per se, but the vulnerability it entails.

"The recent commodity price downturn is a case in point. After reaching a peak between 2008 and 2010, commodity prices were substantially lower between 2013 and 2017. This reduction contributed to an economic slowdown in 64 commodity-dependent countries, with several of them going into recession," she said.

And as their economies slowed down, fiscal positions worsened and public debt rose, often resulting in increased external debt.

Between 2008 and 2017, the external debt of 17 commodity-dependent developing countries increased by more than 25% of GDP.

"After these shocks, you can imagine what follows: less investment in infrastructure, social protection and education spending, to name but a few examples. The very investment needed to diversify the economy is curtailed and efforts to break away from commodity dependence are thwarted.”

Coke-Hamilton declared that this is the vicious cycle in which many countries are trapped.

The top three destination markets for Iran's commodity exports during 1995-2017 were China, India and Japan, accounting for 34%, 14% and 11% of total exports respectively.